Brazilian miner Vale has demonstrated that its cost-cutting efforts are paying off by reporting first-quarter earnings above market expectations after stripping out $US3.6 billion of costs on an annualised basis.

Global peers, including
BHP Billiton
and
Rio Tinto
, have also embarked on cost-cutting drives to maximise margins in the face of falling commodities prices.

Vale, the world’s largest iron ore miner, reported a 10.1 per cent fall in first-quarter earnings to $US3.2 billion as a result of lower prices.

“When you look at the cost side of our operations, the results were extraordinary," chief financial officer
Luciano Siani
said in a video message after the earnings release.

“We have reduced the costs and expenses all across the board."

BHP has not set a hard cost-cutting target for this financial year but it stripped out $US1.9 billion on an annualised basis in the first half and chief financial officer
Graham Kerr
has flagged that that is expected to increase for the full year.

Rio expects to reduce its costs by around $US2.75 billion this calendar year, including cuts to exploration and evaluation spending captured in the Vale and BHP figures.

Meaningful cost cuts

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Vale said this had been the “first time in many years" in which it had achieved meaningful cost cuts.

“Despite the progress achieved, there is still a long road towards the transformation of the cost structure to guarantee shareholder value creation through the cycles, mitigating the influence of price gyrations," the miner said.

Vale said initiatives in the cost-cutting drive included cuts to projects and its geographic presence globally, a focus on value growth over speed, changes in procurement and the idling of loss-making operations. It is also trimming discretionary expenses across the board.

The Platts index price of iron ore averaged $US148 a tonne in the first quarter, up from $US122 a tonne in the December quarter. Vale said it received a price of $US111.70 a tonne in the first quarter, up from $US100.43 a tonne in the December quarter. Its prices can be affected by freight costs, which are higher from Brazil to China than from Australia to China, and some of its tonnages are still sold based on pricing lags.

Canadian cuts

The miner said iron ore inventories in China remained at low levels and property and infrastructure investments had continued to increase in the first quarter, with the “soft patch" in the economy caused by weakness in consumption.

Vale expects a boom in non-bank financing in China in the first quarter will produce positive economic effects in the next three to six months.

However, it warned the iron ore price, now at $US135.10 a tonne, was expected to remain highly volatile, with inventory cycles exacerbating price swings.

In base metals, Vale said all production plans were being reviewed based on “production at the right cost" and divestments of non-core assets were being considered.

It has cut $C1 billion ($950 million) from its sustaining capital plans at its Sudbury nickel operations in Ontario over the next three years and is considering the prospect of a strategic partnership at its Thompson nickel operations in Manitoba.

In coal, it is continuing to progress the development of a $US4.4 billion railway line and port in Mozambique to expand exports. To date, $US510 million has been spend on the project, which is due to be completed by the end of 2014.

“We are still looking for ways to enhance our logistics performance in Africa in order to take the Moatize coal mine to its potential production and we continue to turn around the Australian operations in coal," Mr Siani said.